Federal Circuit Upholds Fee-Shifting Terms of Settlement Agreement

23 September 2013 PharmaPatents Blog

In Buckhorn Inc. v. Orbis Corp., the Federal Circuit reversed the district court’s refusal to enforce the fee-shifting terms of a licence and settlement agreement. The district court found that the terms did not apply because the new action was not brought to enforce the agreement, and also considered that the fee-shifting terms were unenforceable as unconscionable. The Federal Circuit disagreed on both points.

The Agreement At Issue

In 1992, predecessors-in-interest to the parties (Xytec and Ropak) settled patent infringement litigation with an agreement that included the following fee-shifting terms:

In any litigation based on a controversy or dispute arising out of or in connection with this Agreement or its interpretation, the prevailing party shall be entitled to recover all fees, costs, reasonable attorney’s fees, and other expenses attributable to the litigation.

The New Dispute 

In 2000, Ropak transferred its entire materials handling business (including its rights under agreement) to Linpac Materials Handling, Inc. (“LMH”), which was acquired by Orbis in 2006.

In 2006, the successor-in-interest to Xytec licensed several patents to Myers Industries, Inc., including U.S. Patent 5,199,592, which was encompassed by the agreement. Under the license, Myers could commence infringement actions and transfer its rights to a subsidiary without notice .

In 2008, Buckhorn Inc., a wholly-owned subsidiary of Myers, brought the infringement action at issue against Orbis and others.

Orbis raised the Ropak-Xytec agreement as an affirmative defense, asserting that it was the successor-in-interest of Ropak’s rights under the agreement. After the district court granted Orbis’ motion for partial summary judgment on its affirmative license defense, Orbis moved for an award of fees under the fee-shifting terms of the agreement.

As summarized by the Federal Circuit:

The district court denied ORBIS’s motion, stating that this “case cannot be a litigation based on a controversy or dispute arising out of or in connection with the License when Plaintiffs clearly had no knowledge of the License at the time the litigation was initiated.” …. The district court also found that enforcing the fee-shifting provision would be unconscionable.

The Federal Circuit Decision

The Federal Circuit opinion was authored by Judge O’Malley and joined by Chief Judge Rader and Judge Reyna.

Reviewing the agreement under California state law (in accordance with its choice of law provision), the Federal Circuit found:

The district court erred by denying ORBIS’s motion for fees and costs based solely on the fact that the Buckhorn plaintiff was unaware of the Ropak-Xytec Agreement when it instituted the infringement action against ORBIS …. Apparently, the trial court believed that an action could only arise out of the license agreement if the action included an express attempt to enforce or rescind it.

In particular, the Federal Circuit found that the litigation was “based on a controversy or dispute … in connection with” the agreement because it “related to the very intellectual property rights addressed in [the agreement],” and because the existence of the agreement resolved the patent infringement issues in the litigation.

The Federal Circuit also rejected the district court’s concerns that the fee-shifting provision was “unconscionable.” The court summarized California law on this point as follows:

[A]n unconscionable contract ordinarily involves both a procedural and a substantive element:
(1) oppression or surprise due to unequal bargaining power, and
(2) overly harsh or one-sided results.

The Federal Circuit determined that the district court’s error stemmed from its frame of reference:

In denying fees and costs, the district court found that “[i]t would be unconscionable to require Plaintiffs to pay fees and costs under the License, as Plaintiffs were not even given a copy of the License until May 28, 2010, over 18 months after the case was filed.” …. It also stated that applying the fee provision “would be unconscionable given the timeline and facts of this case,” … based on Plaintiffs’ alleged lack of awareness of the Ropak-Xytec Agreement as of the filing of the lawsuit.

According to the Federal Circuit:

The district court erred by basing its finding of unconscionability on events taking place after Ropak and Xytec entered into their agreement rather than at the time they entered it. As a determination of unconscionability considers factors at the time the contract was made, the district court erred by considering subsequent events.

Thus, the Federal Circuit held that the district court could “not refuse to make an award given the unambiguous terms of the contract,” could consider any “dilatory conduct on the part of ORBIS during discovery” when assessing the reasonableness of any fee award.

Footnote 3

While the district court relied on the Plaintiffs’ lack of knowledge of the agreement, the Federal Circuit makes the following point in footnote 3 of its opinion:

Schoeller does not contend it lacked knowledge of the Ropak-Xytec Agreement; it only denied being aware that the agreement covered the ’592 patent. In fact, Schoeller produced the Ropak-Xytec Agreement in its initial productions during discovery and produced documents and witnesses reflecting knowledge of the agreement prior to the litigation. ….

There is no further discussion of this issue, but it is interesting that the agreement included a license to U.S. Patent 4,967,927 and “any corresponding divisional, continuations, continuations-in-part, extensions, or reissues,” and the ’592 patent is a grandchild patent of the ’927 patent.

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